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Zix Reports Second Quarter 2019 Financial Results

15% Organic Revenue Growth, Cross Sell Success, Expanding Adjusted EBITDA Margins, and Successful Completion of Integration Milestones Accelerate Company’s Growth Strategy

DALLAS--(BUSINESS WIRE)--Aug. 1, 2019-- Zix Corporation (Zix) (NASDAQ: ZIXI), a leader in email security, today announced financial results for the second quarter ended June 30, 2019.

Second Quarter 2019 Financial Highlights (results compared to the same year-ago quarter)

  • Revenue increased 162% to $45.9 million. Total overall organic revenue growth across Zix and AppRiver was 15%.
  • Annual recurring revenue (ARR), representing contract value attributable to the 12 months ending June 30, 2019, increased 162% to $193.7 million. Total overall organic ARR growth across Zix and AppRiver was 17%.
  • Total billings increased 7% to $46.3 million.
  • GAAP net loss attributable to common stockholders totaled $7.1 million compared to net income of $1.8 million. The company’s net loss attributable to common shareholders includes the effect of a deemed dividend to preferred shareholders of $3.4 million and acquisition-related expenses of $2.8 million.
  • GAAP fully diluted earnings (loss) per share attributable to common stockholders totaled ($0.13) compared to $0.03.
  • Non-GAAP adjusted net income before deemed dividends and excluding deferred tax (benefit) expense totaled $5.8 million compared to $3.9 million. The company’s Q2 2019 non-GAAP adjusted net income also excludes $2.8 million of acquisition-related expenses.
  • Non-GAAP adjusted net income per share before deemed dividends and excluding deferred tax (benefit) expense and acquisition-related expenses increased 51% to $0.11.
  • Adjusted EBITDA increased 143% to $10.7 million, representing an adjusted EBITDA margin of 23.4%.

Management Commentary

“The second quarter of 2019 demonstrated the continued solid execution of our strategy, as we delivered another quarter of strong, profitable growth and made significant progress integrating Zix and AppRiver,” said David Wagner, Zix’s Chief Executive Officer. “We achieved overall organic revenue growth of 15% and adjusted EBITDA margin of 23%—pushing us right up against ‘the rule of 40,’ and demonstrating that our business is moving in the right direction. We also delivered on our first product integration milestones ahead of schedule, and we are seeing early signs of strong cross-selling with more than 150 trials of ZixEncrypt and ZixArchive in the AppRiver channel and more than a dozen closed Office 365 deals in the Zix channel during the second quarter. Looking ahead, we are beginning to execute on our longer-term product integration objectives and we are focusing on accelerating cross-sales. Over time, this will enable us to drive higher attach rates, Annual Recurring Revenue, and revenue growth, which will further validate the AppRiver acquisition and our strategy to maximize shareholder value.”

Zix’s Chief Financial Officer Dave Rockvam added: “As our results for the quarter demonstrate, we are continuing to build a head of steam, generating significant progress integrating AppRiver, expanding our product suite into the cloud, starting new trials, securing new customers, and retaining and cross-selling our installed base. For the company as a whole, the business performance translated into organic Annual Recurring Revenue growth of 17%. Total revenue of $45.9 million helped us exceed our revenue guidance, and our adjusted EBITDA margin increased 360 basis points sequentially to more than 23%, as we continue to outperform and build a foundation for more robust profitable growth. Overall, these past six months have shown us not only the synergistic elements of Zix’s and AppRiver’s businesses, partners, products, and customers, but also that our team is driven by the vision and opportunity of building the leading cloud-based email security and productivity solutions provider in the marketplace.”

Recent Operational Highlights

Second Quarter 2019 Corporate Financial Summary and Other Operational Metrics (1)

$ in Millions, except per share data

Q2 2019

Q2 2018

Change (2)

Revenue

$45.9

$17.5

162.4%

GAAP Net Income (Loss) Attributable to Common Stockholders

($7.1)

$1.8

(384.6%)

GAAP Net Income (Loss) Per Share Attributable to Common Stockholders – Diluted

($0.13)

$0.03

(380.6%)

Non-GAAP Adjusted Net Income Attributable to Common Stockholders (4)

$2.5

$3.9

(36.8%)

Non-GAAP Adjusted Net Income Per Share Attributable to Common Stockholders – Diluted (4)

$0.05

$0.07

(33.8%)

Non-GAAP Adjusted Net Income Before Deemed Dividends

$6.7

$3.1

117.3%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends - Diluted

$0.13

$0.06

118.1%

Non-GAAP Adjusted Net Income Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense

$5.8

$3.9

50.2%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense

$0.11

$0.07

50.8%

EBITDA (3)(4)

$5.4

$3.4

55.8%

EBITDA Margin

11.7%

19.7%

(8.0 pts)

Adjusted EBITDA (4)

$10.7

$4.4

143.2%

Adjusted EBITDA Margin (4)

23.4%

25.2%

(1.8 pts)

Total Billings

$46.3

$43.1

7.3%

Fiscal Six Months 2019 Corporate Financial Summary and Other Operational Metrics (1)

$ in Millions, except per share data

YTD 2019

YTD 2018

Change (2)

Revenue

$75.2

$34.2

120.2%

GAAP Net Income (Loss) Attributable to Common Stockholders

($15.8)

$3.8

(422.7%)

GAAP Net Income (Loss) Per Share Attributable to Common Stockholders – Diluted

($0.30)

$0.07

(421.1%)

Non-GAAP Adjusted Net Income Attributable to Common Stockholders (4)

$3.8

$8.2

(53.9%)

Non-GAAP Adjusted Net Income Per Share Attributable to Common Stockholders – Diluted (4)

$0.07

$0.15

(52.2%)

Non-GAAP Adjusted Net Income Before Deemed Dividends

$11.6

6.5

78.5%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends – Diluted

$0.22

$0.12

80.1%

Non-GAAP Adjusted Net Income Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense

$9.6

8.2

17.0%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense - Diluted

$0.18

$0.15

18.1%

EBITDA (3)(4)

$1.9

$6.9

(72.5%)

EBITDA Margin

2.5%

20.3%

(17.7 pts)

Adjusted EBITDA (4)

$16.5

$9.2

78.9%

Adjusted EBITDA Margin (4)

22.0%

27.1%

(5.1 pts)

Total Billings

$74.7

$68.0

10.0%

ARR (at June 30, 2019)

$193.7

$74.0

161.8%

(1)

Metrics include results from AppRiver, unless otherwise specified

(2)

Changes are based on actual numbers versus numbers shown in the columns, which may reflect rounding

(3)

Earnings before interest, taxes, depreciation and amortization

(4)

A reconciliation of GAAP to non-GAAP results is included in this press release and available on the Zix investor relations website at http://investor.zixcorp.com

Financial Outlook

For the third quarter of 2019, the company forecasts revenue to range between $47.0 million and $47.5 million. The company forecasts fully diluted GAAP earnings (loss) per share to be in a range of ($0.04) and ($0.02) and fully diluted non-GAAP adjusted earnings per share to be between $0.12 and $0.14 for the third quarter of 2019. The financial outlook includes a required GAAP adjustment on the deferred revenue acquired from AppRiver.

Zix is targeting ARR of approximately $204 million to $209 million (previously $202 million to $209 million) at fiscal 2019 year end, representing a growth rate of approximately 13% to 16% (previously 12% to 16%) year-over-year. Zix management is also expecting revenue of approximately $48.0 million to $50 million (previously $47.0 million to $50.0 million) with a 25% adjusted EBITDA margin (previously 24%) in the fourth quarter of 2019.

For the fiscal year of 2019, the company is increasing its previously disclosed revenue guidance to a range of between $170.0 million to $172.0 million (previously $167.0 million to $169.0 million), representing an increase of between 141% and 144% (previously 135% and 140%) compared to fiscal year 2018. The company also updates its fully diluted GAAP earnings (loss) per share guidance to a range of between ($0.24) and ($0.21) [previously ($0.10) and $0.02] and increases its fully diluted non-GAAP adjusted earnings per share guidance to be between a range of $0.44 and $0.46 for fiscal year 2019 (previously $0.40 and $0.42). The financial outlook includes approximately 10 months of AppRiver financial results consolidated into Zix and also includes a required GAAP adjustment on the deferred revenue acquired from AppRiver. Zix is forecasting Q3, Q4 and full year 2019 to result in a GAAP net loss position and will be using an approximate basic share count of 53.3 million for Q3 and 53.5 million for Q4.

Conference Call Information

Management will discuss these financial results and outlook on a conference call today (August 1, 2019) at 5:00 p.m. ET (2:00 p.m. PT).

A live webcast of the conference call will be available in the investor relations section of Zix’s website here. Alternatively, participants can access the conference call by dialing 1-855-853-6940 (U.S. toll-free) or 1-720-634-2906 (international) at least 15 minutes before the call and entering access code 7877124. If you have any difficulty connecting with the conference call, please contact Gateway Investor Relations at 1-949-574-3860.

An audio replay of the conference will be available for seven days, by dialing 1-855-859-2056 (U.S. toll-free) or 1-404-537-3406 (international) and entering the access code 7877124. An archive of the webcast will also be available on the Zix investor relations website.

About Zix Corporation

Zix Corporation (Zix) is a leader in email security. Trusted by the nation’s most influential institutions in healthcare, finance and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention, advanced threat protection, unified information archiving and bring your own device (BYOD) mobile security. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance needs. Zix is publicly traded on the Nasdaq Global Market under the symbol ZIXI. For more information, visit www.zixcorp.com.

Statements in this release that are not purely historical facts or that necessarily depend upon future events, including statements about forecasts of sales, revenue, annual recurring revenue, EBITDA, EBITDA margin, earnings or earnings per share, potential benefits of acquisitions and strategic relationships, or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to Zix on the date this release was issued. Zix undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including but not limited to risks or uncertainties related to the completion and integration of acquisitions, the effects of our debt and equity financing transactions, year-end adjustments to previously reported preliminary unaudited financial information, market acceptance of both existing and new Zix solutions, changing market dynamics resulting from technological change, innovation and continuing customer migration to the cloud, changes in the competitive ecosystem, and how privacy and data security laws may affect demand for Zix data protection solutions. Zix may not succeed in addressing these and other risks. Further information regarding factors that could affect Zix’s business and its financial and other results can be found in the risk factors section of Zix’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, each as filed with the Securities and Exchange Commission, as those risk factors may be supplemented in subsequent filings.

ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

June 30,

 

 

 

2019

 

December 31,

 

(unaudited)

 

2018

ASSETS

Current assets:

Cash and cash equivalents

$

11,323,000

$

27,109,000

Receivables, net

 

8,970,000

 

3,188,000

Prepaid and other current assets

 

4,609,000

 

3,176,000

Total current assets

 

24,902,000

 

33,473,000

Property and equipment, net

 

9,475,000

 

3,924,000

Operating lease assets

 

10,698,000

 

-

Other assets and deferred costs

 

10,581,000

 

9,424,000

Intangible Assets, Net

 

152,586,000

 

15,251,000

Goodwill

 

173,398,000

 

13,783,000

Deferred tax assets

 

30,793,000

 

28,785,000

Total assets

$

412,433,000

$

104,640,000

 
 

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

25,632,000

$

10,516,000

Deferred revenue

 

43,456,000

 

30,622,000

Other current liabilities

 

5,803,000

 

-

Total current liabilities

 

74,891,000

 

41,138,000

Long-term liabilities:

Deferred revenue

 

1,414,000

 

1,539,000

Deferred rent

 

-

 

1,016,000

Operating lease liabilities

 

10,575,000

 

-

Debt

 

176,563,000

 

-

Total long-term liabilities

 

188,552,000

 

2,555,000

Total liabilities

 

263,443,000

 

43,693,000

Total preferred stock

 

102,347,000

 

-

Total stockholders’ equity

 

46,643,000

 

60,947,000

Total liabilities, preferred stock and stockholders’ equity

$

412,433,000

$

104,640,000

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended June 30

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

Revenue

$

45,916,000

 

$

17,500,000

 

$

75,215,000

 

$

34,153,000

 

 

Cost of revenue

 

20,304,000

 

 

3,806,000

 

 

31,443,000

 

 

7,319,000

 

Gross profit

 

25,612,000

 

 

13,694,000

 

 

43,772,000

 

 

26,834,000

 

Operating expenses:

Research and development

 

5,311,000

 

 

2,978,000

 

 

9,458,000

 

 

5,956,000

 

Selling, general and administrative

 

21,872,000

 

 

8,562,000

 

 

42,136,000

 

 

16,115,000

 

Total operating expenses

 

27,183,000

 

 

11,540,000

 

 

51,594,000

 

 

22,071,000

 

 

Operating income

 

(1,571,000

)

 

2,154,000

 

 

(7,822,000

)

 

4,763,000

 

Operating margin

 

-3

%

 

12

%

 

-10

%

 

14

%

 

Other income (expense)

Investment and other income

 

9,000

 

 

360,000

 

 

101,000

 

 

479,000

 

Interest expense and other expense

 

(3,167,000

)

 

-

 

 

(4,425,000

)

 

-

 

Total other income (expense)

 

(3,158,000

)

 

360,000

 

 

(4,324,000

)

 

479,000

 

 

Income before income taxes

 

(4,729,000

)

 

2,514,000

 

 

(12,146,000

)

 

5,242,000

 

Income tax benefit (expense)

 

1,027,000

 

 

(674,000

)

 

2,175,000

 

 

(1,510,000

)

 

Net (loss) income

$

(3,702,000

)

$

1,840,000

 

$

(9,971,000

)

$

3,732,000

 

 

Deemed and accrued dividends on preferred stock

 

(3,371,000

)

 

-

 

 

(5,804,000

)

 

-

 

 

Net (loss) income attributable to common shareholders

$

(7,073,000

)

$

1,840,000

 

$

(15,775,000

)

$

3,732,000

 

 

Basic (loss) income per share attributable to common shareholders:

$

(0.13

)

$

0.04

 

$

(0.30

)

$

0.07

 

 

Diluted (loss) income per share attributable to common shareholders:

$

(0.13

)

$

0.03

 

$

(0.30

)

$

0.07

 

 

Shares used in per share calculation - basic

 

53,028,854

 

 

52,467,904

 

 

52,872,190

 

 

52,670,540

 

 

Shares used in per share calculation - diluted

 

53,028,854

 

 

53,217,100

 

 

52,872,190

 

 

53,347,976

 

 

Other Comprehensive income, net of tax:

Foreign currency translation adjustments

 

(55,000

)

 

-

 

 

(88,000

)

 

-

 

Comprehensive income

$

(3,757,000

)

$

1,840,000

 

$

(10,059,000

)

$

3,732,000

 

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30,

 

2019

 

2018

Operating activities:

Net (loss) income

$

(9,971,000

)

$

3,732,000

 

Non-cash items in net income

 

11,165,000

 

 

4,844,000

 

Changes in operating assets and liabilities

 

119,000

 

 

(4,173,000

)

Net cash provided by operating activities

 

1,313,000

 

 

4,403,000

 

 

Investing activities:

Purchases of property and equipment and capitalized software

 

(4,536,000

)

 

(1,367,000

)

Acquisition of business, net of cash acquired

 

(283,245,000

)

 

(11,773,000

)

Net cash used in investing activities

 

(287,781,000

)

 

(13,140,000

)

 

Financing activities:

Proceeds from issuance of series A preferred stock, net of offering costs

 

96,588,000

 

 

-

 

Proceeds from exercise of stock options

 

180,000

 

 

33,000

 

Proceeds from long term debt

 

185,000,000

 

 

-

 

Debt issuance costs

 

(6,443,000

)

 

-

 

Repayment of long term debt

 

(438,000

)

 

-

 

Repayment of finance lease obligations

 

(770,000

)

 

-

 

Payment of acquisition-related contingent consideration

 

(1,540,000

)

 

(605,000

)

Purchase of treasury stock

 

(1,814,000

)

 

(6,004,000

)

Net cash provided used in financing activities

 

270,763,000

 

 

(6,576,000

)

 

Effect of exchange rate changes on cash

 

(81,000

)

 

-

 

 

(Decrease) Increase in cash and cash equivalents

 

(15,786,000

)

 

(15,313,000

)

Cash and cash equivalents, beginning of period

 

27,109,000

 

 

33,009,000

 

Cash and cash equivalents, end of period

$

11,323,000

 

$

17,696,000

 

ZIX CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(Unaudited)

 

Three Months Ended

 

Six Months Ended

June 30,

 

June 30,

2019

 

2018

 

2019

 

2018

Revenue:

GAAP revenue

$

45,916,000

 

$

17,500,000

 

$

75,215,000

 

$

34,153,000

 

 

Cost of revenue

GAAP cost of revenue

$

20,304,000

 

$

3,806,000

 

$

31,443,000

 

$

7,319,000

 

Stock-based compensation charges (1)

(A)

 

(163,000

)

 

(80,000

)

 

(267,000

)

 

(147,000

)

Strategic consulting and litigation costs (2)

(B)

 

(243,000

)

 

-

 

 

(272,000

)

 

(1,000

)

Intangible Amortization (3)

(C)

 

(1,893,000

)

 

(63,000

)

 

(2,528,000

)

 

(140,000

)

Corporate separation payment (4)

(D)

 

(3,000

)

 

(28,000

)

 

(52,000

)

 

(28,000

)

Non-GAAP adjusted cost of revenue

$

18,002,000

 

$

3,635,000

 

$

28,324,000

 

$

7,003,000

 

 

Gross profit:

GAAP gross profit

$

25,612,000

 

$

13,694,000

 

$

43,772,000

 

$

26,834,000

 

Stock-based compensation charges (1)

(A)

 

163,000

 

 

80,000

 

 

267,000

 

 

147,000

 

Strategic consulting and litigation costs (2)

(B)

 

243,000

 

 

-

 

 

272,000

 

 

1,000

 

Intangible Amortization (3)

(C)

 

1,893,000

 

 

63,000

 

 

2,528,000

 

 

140,000

 

Corporate separation payment (4)

(D)

 

3,000

 

 

28,000

 

 

52,000

 

 

28,000

 

Non-GAAP adjusted gross profit

$

27,914,000

 

$

13,865,000

 

$

46,891,000

 

$

27,150,000

 

 

Research and development expense

GAAP research and development expense

$

5,311,000

 

$

2,978,000

 

$

9,458,000

 

$

5,956,000

 

Stock-based compensation charges (1)

(A)

 

(296,000

)

 

(112,000

)

 

(470,000

)

 

(203,000

)

Strategic consulting and litigation costs (2)

(B)

 

(164,000

)

 

(2,000

)

 

(335,000

)

 

(58,000

)

Intangible Amortization (3)

(C)

 

(76,000

)

 

(76,000

)

 

(152,000

)

 

(76,000

)

Non-GAAP adjusted research and development expense

$

4,800,000

 

$

2,788,000

 

$

8,265,000

 

$

5,619,000

 

 

Selling and marketing expense

GAAP selling and marketing expense

$

14,077,000

 

$

5,453,000

 

$

24,011,000

 

$

9,831,000

 

Stock-based compensation charges (1)

(A)

 

(686,000

)

 

(230,000

)

 

(1,118,000

)

 

(413,000

)

Strategic consulting and litigation costs (2)

(B)

 

(341,000

)

 

-

 

 

(742,000

)

 

(7,000

)

Intangible Amortization (3)

(C)

 

(3,110,000

)

 

(155,000

)

 

(4,251,000

)

 

(224,000

)

Non-GAAP adjusted selling and marketing expense

$

9,779,000

 

$

5,068,000

 

$

17,261,000

 

$

9,187,000

 

 

General and administrative expense

GAAP general and administrative expense

$

7,795,000

 

$

3,109,000

 

$

18,125,000

 

$

6,284,000

 

Stock-based compensation charges (1)

(A)

 

(819,000

)

 

(422,000

)

 

(1,338,000

)

 

(709,000

)

Strategic consulting and litigation costs (2)

(B)

 

(2,052,000

)

 

(87,000

)

 

(8,469,000

)

 

(794,000

)

Corporate separation payment (4)

(D)

 

(449,000

)

 

-

 

 

(689,000

)

 

40,000

 

Non-GAAP adjusted general and administrative expense

$

4,475,000

 

$

2,600,000

 

$

7,629,000

 

$

4,821,000

 

 

Operating income:

GAAP operating income

$

(1,571,000

)

$

2,154,000

 

$

(7,822,000

)

$

4,763,000

 

Stock-based compensation charges (1)

(A)

 

1,964,000

 

 

844,000

 

 

3,193,000

 

 

1,472,000

 

Strategic consulting and litigation costs (2)

(B)

 

2,800,000

 

 

89,000

 

 

9,818,000

 

 

860,000

 

Intangible Amortization (3)

(C)

 

5,079,000

 

 

294,000

 

 

6,931,000

 

 

440,000

 

Corporate separation payment (4)

(D)

 

588,000

 

 

28,000

 

 

1,616,000

 

 

(12,000

)

Non-GAAP adjusted operating income

$

8,860,000

 

$

3,409,000

 

$

13,736,000

 

$

7,523,000

 

Adjusted Operating Margin

 

19.3

%

 

19.5

%

 

18.3

%

 

22.0

%

 

Net income:

GAAP net (loss) income

$

(3,702,000

)

$

1,840,000

 

$

(9,971,000

)

$

3,732,000

 

Stock-based compensation charges (1)

(A)

 

1,964,000

 

 

844,000

 

 

3,193,000

 

 

1,472,000

 

Strategic consulting and litigation costs (2)

(B)

 

2,800,000

 

 

89,000

 

 

9,818,000

 

 

860,000

 

Intangible Amortization (3)

(C)

 

5,079,000

 

 

294,000

 

 

6,931,000

 

 

440,000

 

Corporate separation payment (4)

(D)

 

588,000

 

 

28,000

 

 

1,616,000

 

 

(12,000

)

Non-GAAP adjusted net income

$

6,729,000

 

$

3,095,000

 

$

11,587,000

 

$

6,492,000

 

 

Deferred tax (benefit) expense

 

(904,000

)

 

780,000

 

 

(2,008,000

)

 

1,692,000

 

Non-GAAP adjusted net income excluding deferred tax (benefit) expense

$

5,825,000

 

$

3,875,000

 

$

9,579,000

 

$

8,184,000

 

 

Deemed and accrued dividends on preferred stock

 

(3,371,000

)

 

-

 

 

(5,804,000

)

 

-

 

Adjusted Net income attributable to common stockholders

$

2,454,000

 

$

3,875,000

 

$

3,775,000

 

$

8,184,000

 

 

Diluted net income per common share:

GAAP net income per share before deemed dividends

$

(0.07

)

$

0.03

 

$

(0.19

)

$

0.07

 

Adjustments per share

(A-D)

$

0.20

 

$

0.02

 

$

0.41

 

$

0.05

 

Non-GAAP adjusted net income per share before deemed dividends

$

0.13

 

$

0.06

 

$

0.22

 

$

0.12

 

 

Deferred tax (benefit) expense impact to Non-GAAP adjusted net income before deemed dividends per share

(E)

$

(0.01

)

$

0.01

 

$

(0.04

)

$

0.03

 

Non-GAAP adjusted net income before deemed dividends per share excluding deferred tax (benefit) expense

$

0.11

 

$

0.07

 

$

0.18

 

$

0.15

 

 

Deemed dividends per share impact to Non-GAAP adjusted net income

$

(0.06

)

$

-

 

$

(0.11

)

$

-

 

Adjusted Net income per share attributable to common stockholders

$

0.05

 

$

0.07

 

$

0.07

 

$

0.15

 

 

Shares used to compute Non-GAAP adjusted net income per share - diluted

 

53,028,854

 

 

53,217,100

 

 

52,872,190

 

 

53,347,976

 

 

Reconciliation of Net income to EBITDA and Adjusted EBITDA:

(F)

Net income

$

(3,702,000

)

$

1,840,000

 

$

(9,971,000

)

$

3,732,000

 

Income tax provision

 

(1,027,000

)

 

674,000

 

 

(2,175,000

)

 

1,510,000

 

Interest expense

 

3,171,000

 

 

-

 

 

4,425,000

 

 

-

 

Depreciation

 

1,551,000

 

 

577,000

 

 

2,236,000

 

 

1,175,000

 

Amortization

 

5,385,000

 

 

358,000

 

 

7,390,000

 

 

504,000

 

EBITDA

 

5,378,000

 

 

3,449,000

 

 

1,905,000

 

 

6,921,000

 

 

Adjustments:

Stock-based compensation charges (1)

(A)

 

1,964,000

 

 

844,000

 

 

3,193,000

 

 

1,472,000

 

Strategic consulting and litigation costs (2)

(B)

 

2,800,000

 

 

89,000

 

 

9,818,000

 

 

860,000

 

Corporate separation payment (4)

(D)

 

588,000

 

 

28,000

 

 

1,616,000

 

 

(12,000

)

Adjusted EBITDA

$

10,730,000

 

$

4,410,000

 

$

16,532,000

 

$

9,241,000

 

 

Adjusted EBITDA margin

 

23.4

%

 

25.2

%

 

22.0

%

 

27.1

%

 

(1) Stock-based compensation charges are included as follows:

Cost of revenues

$

163,000

 

$

80,000

 

$

267,000

 

$

147,000

 

Research and development

 

296,000

 

 

112,000

 

 

470,000

 

 

203,000

 

Selling and marketing

 

686,000

 

 

230,000

 

 

1,118,000

 

 

413,000

 

General and administrative

 

819,000

 

 

422,000

 

 

1,338,000

 

 

709,000

 

$

1,964,000

 

$

844,000

 

$

3,193,000

 

$

1,472,000

 

(2) Strategic consulting, acquisition, integration and litigation costs are included as follows:

Cost of revenues

 

243,000

 

 

-

 

 

272,000

 

 

1,000

 

Research and development

 

164,000

 

 

2,000

 

 

335,000

 

 

58,000

 

Selling and marketing

 

341,000

 

 

-

 

 

742,000

 

 

7,000

 

General and administrative

 

2,052,000

 

 

87,000

 

 

8,469,000

 

 

794,000

 

$

2,800,000

 

$

89,000

 

$

9,818,000

 

$

860,000

 

(3) Intangible Amortization is included as follows:

Cost of revenues

 

1,893,000

 

 

63,000

 

 

2,528,000

 

 

140,000

 

Research and development

 

76,000

 

 

76,000

 

 

152,000

 

 

76,000

 

Selling and marketing

 

3,110,000

 

 

155,000

 

 

4,251,000

 

 

224,000

 

$

5,079,000

 

$

294,000

 

$

6,931,000

 

$

440,000

 

(4) Corporate separation payment is included as follows:

Cost of revenues

 

3,000

 

 

28,000

 

 

52,000

 

 

28,000

 

Research and development

 

(25,000

)

 

-

 

 

236,000

 

 

-

 

Selling and marketing

 

161,000

 

 

-

 

 

639,000

 

 

-

 

General and administrative

 

449,000

 

 

-

 

 

689,000

 

 

(40,000

)

$

588,000

 

$

28,000

 

$

1,616,000

 

$

(12,000

)

(5) Net Income tax components:

Current tax (benefit)/expense

 

(123,000

)

 

(106,000

)

 

(167,000

)

 

(182,000

)

Deferred tax (benefit)/expense

 

(904,000

)

 

780,000

 

 

(2,008,000

)

 

1,692,000

 

$

(1,027,000

)

$

674,000

 

$

(2,175,000

)

$

1,510,000

 

This presentation includes Non-GAAP measures. Our Non-GAAP measures, including "Non-GAAP adjusted net income and net income per share excluding deferred tax expense" are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see Notes to Reconciliation of GAAP to Non-GAAP Financial Measures on the next page.

ZIX CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES OUTLOOK

 

LOW

 

HIGH

 

LOW

 

HIGH

Three Months Ended

 

Three Months Ended

 

Twelve Months Ended

 

Twelve Months Ended

September 30,

 

September 30,

 

December 31,

 

December 31,

2019

 

2019

 

2019

 

2019

Revenue:

GAAP revenue

$

47,000,000

 

$

47,500,000

 

$

170,000,000

 

$

172,000,000

 

 

Diluted net income per common share:

GAAP net income

$

(0.04

)

$

(0.02

)

$

(0.24

)

$

(0.21

)

Stock-based compensation charges

$

0.04

 

$

0.04

 

$

0.13

 

$

0.12

 

Strategic consulting, acquisition and litigation costs

$

0.02

 

$

0.01

 

$

0.23

 

$

0.22

 

Intangible Amortization

$

0.10

 

$

0.10

 

$

0.34

 

$

0.34

 

Corporate separation payment

$

0.01

 

$

0.00

 

$

0.04

 

$

0.03

 

Non-GAAP adjusted net income per share

$

0.13

 

$

0.14

 

$

0.49

 

$

0.51

 

 

Deferred tax (benefit) expense

$

(0.01

)

$

(0.00

)

$

(0.05

)

$

(0.04

)

Non-GAAP adjusted net income per share excluding deferred tax (benefit) expense

$

0.12

 

$

0.14

 

$

0.44

 

$

0.46

 

 

Deemed dividends per share impact to Non-GAAP adjusted net income

$

(0.04

)

$

(0.04

)

$

(0.19

)

$

(0.19

)

Adjusted Net loss per share attributable to common stockholders

$

0.09

 

$

0.10

 

$

0.25

 

$

0.28

 

 

Shares used to compute Non-GAAP adjusted net income per share - diluted

 

53,279,000

 

 

53,279,000

 

 

53,138,000

 

 

53,138,000

 

This presentation includes Non-GAAP measures. Our Non-GAAP measures, including "Non-GAAP adjusted net income per share excluding deferred tax expense" are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see Notes to Reconciliation of GAAP to Non-GAAP Financial Measures on the next page.

ZIX CORPORATION
NOTES TO RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

USE OF NON-GAAP FINANCIAL INFORMATION

The Company occasionally utilizes financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) in order to provide investors with an alternative method for assessing our operating results in a manner that enables investors to more thoroughly evaluate our current performance as compared to past performance. We also believe these Non-GAAP measures provide investors with a more informed baseline for modeling the Company’s future financial performance. Management uses these Non-GAAP financial measures to make operational and investment decisions, to evaluate the Company's performance, to forecast and to determine compensation. Further, management utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. We believe that our investors should have access to, and that we are obligated to provide, the same set of tools that we use in analyzing our results. These Non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We have provided definitions below for certain Non-GAAP financial measures, together with an explanation of why management uses these measures and why management believes that these Non-GAAP financial measures are useful to investors. In addition, in our earnings release we have provided tables to reconcile the Non-GAAP financial measures utilized to GAAP financial measures.

ADJUSTED NON-GAAP MEASURES

Our Non-GAAP measures adjust GAAP Cost of revenue, Gross profit, Research and development expense, Selling and marketing expense, General and administrative expense, Operating income, Net income, Net Income excluding deferred tax (benefit) expense, Net income per share - diluted, Net income per share - diluted excluding deferred tax (benefit) expense, and EBITDA for non-cash stock-based compensation expense, and strategic consulting and litigation costs to derive Non-GAAP adjusted Cost of revenue, adjusted Gross profit, adjusted Research and development expense, adjusted Selling and marketing expense, adjusted General and administrative expense, adjusted Operating income, adjusted Net income, adjusted Net income per share - diluted and adjusted EBITDA. We provide a reconciliation of these adjusted Non-GAAP measures to GAAP Gross profit, Operating income, Net income, Net income per share - diluted and EBITDA.

Our forward-looking adjusted Non-GAAP earnings per share information consistently excludes non-cash stock-based compensation expense. Additionally, the adjusted Non-GAAP earnings per share will consistently exclude litigation expenses and non-recurring items that impact our ongoing business. See items (A) through (E) below for further information on the current quarter's reconciling items.

Items (A) through (F) on the "Reconciliation of GAAP to Non-GAAP Financial Measures" table are listed to the right of certain categories under "Gross profit," "Operating income," "Net income," "Net income excluding deferred tax (benefit) expense," "Net income per share - diluted," "Net income per share excluding deferred tax (benefit) expense- diluted," and "EBITDA" and correspond to the categories explained in further detail below under (A) through (F).

(A) Non-cash stock-based compensation charges relating to stock option grants, restricted stock, and restricted stock units awarded to and accounted for in accordance with Share-Based Payment accounting guidance. See (1) on previous page for breakdown of stock-based compensation. Because of varying valuation methodologies, subjective assumptions and varying award types, the Company believes that the exclusion of stock-based compensation charges provides for more accurate comparisons to our peer companies and for a more accurate comparison of our financial results to previous periods. Additionally, the Company believes it is useful to investors to understand the specific impact of non-cash stock-based compensation charges on our operating results.

(B) Strategic consulting, acquisition integration and litigation costs. See item (2) on previous page. The Company’s management excludes certain board-directed consulting costs and litigation expenses when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(C) Intangible amortization costs. See item (3) on previous page. The Company’s management excludes amortization expenses associated with the acquisition of intangible assets when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(D)Corporate separation payment relating to employment termination benefits agreement. See item (4) on previous page. The Company’s management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(E) Deferred tax expense represents the non-cash tax expense included in the GAAP tax provision, including the current period utilization of deferred tax assets created in previous periods. The remaining provision for income taxes represents expected cash taxes to be paid.

(F) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based compensation charges and litigation expenses.

Source: Zix Corporation

Zix Company Contact
Geoff Bibby
(214) 370-2241
gbibby@zixcorp.com

Zix Investor Contact
Matt Glover and Najim Mostamand, CFA
Gateway Investor Relations
(949) 574-3860
ZIXI@gatewayIR.com